The depth of that culture was also on display a decade later in the wake of the tsunami of 2011 that crippled Japan’s Fukushima nuclear plant. Kiyoshi Kurokawa, chairman of the Japanese Diet’s Nuclear Accident Independent Investigation Commission, asserted that the crisis was the result of “ingrained conventions of Japanese culture . . . our reflexive obedience; our reluctance to question authority; . . . our groupism; and our insularity. . . . Had other Japanese been in the shoes of those who bear responsibility for this accident, the result [might] well have been the same.”17
A specific brand of culture—populism—has been particularly debilitating to economic progress. In The Age of Turbulence, I noted that economic populists are clear about their grievances but are unable to offer credible ways to address them. Capitalism and socialism are specific about the conditions they deem necessary for the creation of wealth and rising standards of living. Populism is not. It is a shout of pain.
Many twenty-first century Latin Americans, in my experience, continue to rail against the United States. Venezuela’s Hugo Chavez in particular worked assiduously to his dying day to fan anti-American feelings. But cultures can change, albeit slowly. Brazil, Chile, Mexico, and Peru have had multiple episodes of failed populist policies since the end of World War II, but those formerly populist-driven economies have since successfully adopted more market-sensible policies, and with some backing and filling, have managed to implement significant noninflationary growth in recent years.
The experience of postwar Argentina, on the other hand, has been more sobering. A succession of failed economic programs and periods hobbled by inflation created economic instability. By 1991, the situation had become so desperate that the then-newly elected president, Carlos Menem, turned to Domingo Cavallo, his knowledgeable finance minister, for guidance. With his president’s backing, Cavallo linked the Argentine peso one to one to the American dollar. This was an extremely risky strategy and could have blown apart within hours of implementation. But the boldness of the move and the seeming credibility of the commitment impressed world financial markets. Argentine interest rates dropped sharply, and inflation fell from almost 20,000 percent year over year in March 1990 to a single-digit annual inflation rate by late 1991. I was amazed and hopeful.
Gradually but inexorably, however, the buffer of dollar-borrowing capacity was drawn down as deeply rooted populist policies reemerged. The central bank of Argentina, in a losing effort to support the peso-dollar parity, borrowed dollars from abroad to sell for pesos. The bottom of the barrel was reached at the end of 2001. Protecting its remaining reserve of dollars, the central bank withdrew its one-for-one offer of dollars for pesos in international markets. On January 7, 2002, the peso collapsed with mounting disruption to employment and Argentine standards of living. By mid-2002, it took more than three pesos to buy one dollar. A massive default of Argentine debt induced an initial period of soaring inflation and interest rates. But much to my surprise, financial calm was restored relatively quickly. The sharp decline in the peso had spurred export sales and economic activity.
What I found memorable about this episode was not that Argentine leaders in 2001 were unable to marshal the fiscal and monetary restraint required to hold the peso-dollar link, but that they had been able for a while to persuade their population to maintain the degree of restraint that a pegged peso required. It was clearly a policy aimed at inducing a seminal shift in cultural values that would restore the international stature that Argentina had enjoyed in the years immediately preceding World War I. But cultural inertia proved, as it had many times before, too formidable a barrier. The aftermath of that episode plagues Argentinean economic policy to this day.
THE METRICS OF CULTURE
As I note in Chapter 8, for those economies that seek maximum economic growth, it appears that abstinence and prudence are necessary (though not sufficient) virtues for prosperity. Unless part of productive effort is diverted from immediate consumption and directed toward creating capital “tools,” continually rising standards of living are not achievable. From an economist’s perspective, this may be one of the most important choices of democratic societies. How long and to what extent can a population abstain from immediate consumption?18 And indeed, the consequences of those choices most recently were reflected in the ranking of the savings rates across the Eurozone. I wasn’t surprised to find “spendthrift” Greece at one end of the savings array and “austere” Austria on the other.
The relationship between savings and economic performance, however, is more nuanced. The United States, for example, has by far the highest output per hour and per capita GDP among the world’s major developed countries, yet its savings rate over the past forty years has averaged close to that of Portugal. Moreover, China, on the other hand, has a 50 percent savings rate, but much of what is saved is wasted in funding empty high-rise office buildings and pet projects of important provincial leaders that do not foster long-term growth. The complexity of the tie of savings to economic growth is best illustrated by Exhibit 10.3. In the upper section of the scatter diagram lie all of the major “advanced economies” as classified by the International Monetary Fund. The relationship between their gross national savings rates19 and real per capita GDP (at purchasing power parity) is statistically significant.20 The lower segment, the emerging economies who are members of the G-20, exhibit no statistically significant relationship between per capita GDP and the country’s savings rates.
It is only when we bring finance into the equation that ties between prudence and standards of living become evident. As I noted in Chapter 5, the purpose of financial intermediation is to facilitate the investment of savings, both domestic and borrowed, into high-rate-of-return cutting-edge technologies. The U.S. financial system, despite its periodic breakdowns, has proved historically to be a very efficient economic vehicle to maximize the use of what we put aside to fund our unparalleled productive infrastructure to produce goods and services. Generally, the major developing countries shown in Exhibit 10.3 with a savings rate similar to those in the developed world have per capita GDP only a third to a half as large as developed world nations.21
INNOVATION
But beyond prudence and savings, culture also plays a critical role in capital investment. The United States, for example, has historically had a culture of entrepreneurial risk taking that engenders innovation and has maximized the efficient use of our scarce savings to convert innovation into applied technology. The result is highly productive capital assets. China, on the other hand, despite its lurch toward capitalism, has an authoritarian system that in practice discourages ideas not in line with “politically correct” thinking, meaning the views of Chinese political leaders. As I said earlier, innovation is, by definition, outside of conventional thinking and is therefore a potential threat to political control by the Communist Party. As previously noted, according to a 2011 Thomson Reuters survey of the world’s one hundred most innovative companies, forty were U.S. based while none were Chinese. Saving is thus a necessary, but not a sufficient, condition for high per capita GDP.
Innovative (thinking outside the box) entrepreneurship and prudence are largely, if not wholly, culturally driven traits. Placing hard numbers on such qualitative notions as the protection of property rights and the freedom of labor to organize is difficult terrain for economists. There is inevitably a degree of subjective judgment in such calculations. Nonetheless, the World Bank seems to have credibly surmounted this conceptual barrier and produced a useful paradigm to convert the qualitative to the numerical. As can be seen in Exhibit 10.4, various aspects of culture are successfully tied to per capita real GDP. On each scatter plot, I include what the World Bank is trying to capture statistically.22 In all cases, correlations are between .79 and .81, a remarkably high statistical relationship for qualitative associations such as these. An even tighter correlation exists for the advanced countries, and a very modest one for the emerging countries of the G-20. The World Economic Forum cre
ated a Global Competitive Index,23 which in 2012 was highly correlated with per capita GDP (see Exhibit 10.5). The United States, despite some slippage in recent years, remains first among the large developed countries in competitiveness.
CONSENSUS
While it is rare that a nation has a set of cultural mores embraced without exception by the entire population, there is a visible tendency for much of a society to coalesce around a shared point of view, which can, and often does, differ measurably from the choices of other societies. A functioning society or nation must have some fundamental values held by almost all residents, or it would be in a state of constant internal conflict, if not outright civil warfare. Some organizations have written codes for dress and behavior, such as the military, but many do not.
At a broader national level, we in the United States have the Bill of Rights of our Constitution, which, since our founding, has garnered the virtually unanimous support of our population. Almost every nation has some formal constitution governing the relationship between the state and citizenry, including a set of rules of required behavior. Some nations have no formal written constitution—Great Britain, for example. And then there are constitutions that have little to do with the way a country is governed—the defunct Soviet Union, for example.
SOCIETAL COMMUNICATION
A society requires a means of facilitating communication among members. A common language is important but not essential (for example, Switzerland and Canada). One rarely discussed aspect of the process of communication in a society is the value not just of a common language but of a similar accent to convey a sense of community and foster a sense of comfort. It enhances the extent that herd behavior hones the conveyance of common values throughout a society, thus facilitating the merging of views on, and the formulation of, public policy.
In my teenage days as a musician, I traveled around the United States extensively. One particular incident from that period tells me a great deal about the extent to which America’s culture has changed in the last seven decades. I was on a train from Birmingham to Atlanta, and I happened to find myself seated next to a young southern woman with whom I conversed for the next couple of hours. I can truthfully say that I didn’t understand half of what she was saying, and I am sure she had the same difficulty with my New York accent. I knew she was speaking English, but it sounded as if she was speaking in a foreign tongue.
I am fascinated by the extent in this country to which such geographical differences in accents and dialects have diminished. I remember as a youngster listening to a fairly well-known radio program during which a linguist would interview people at random from the audience and identify, not only from which part of the country the individual originated, but also, with a high degree of accuracy, often the county as well. I doubt very much that such a capability exists today. First, the talking movies that emerged in 1927 (The Jazz Singer) and the advent of nationwide radio about the same time began to compress the differences in accents, but it was television that greatly accelerated the process. Our tendency to mimic each other has helped merge dialects essentially into an American one in which regional differences are now modest, and still contracting.
POLITICS
Our political institutions mirror our cultural mores. Beyond the shared values implicit in our Constitution, we have always had wide-ranging differences about our political priorities. The size of the differences is readily seen in the political mapping of the Congress. In Exhibit 10.6, I chart the political leanings of the 112th Congress from “very liberal” to “very conservative” (based on their voting records), thanks to data collected by VoteView.com. There are very few “moderates” in this profile. The schism is particularly pronounced in the House of Representatives, where a significant part of the Republican majority reflects the ethos of the Tea Party, which exhibits a faint echo of the predominant culture of the nineteenth century—rugged individualism and self-reliance. The Democrats’ roots lie with Roosevelt’s New Deal.
The distribution of the four separate caucuses—Democrats and Republicans of both the Senate and the House—have always portrayed patterns similar to those of the current Congress, going back at least to the dawn of the twentieth century. See, for example, the caucus distribution of the 56th Congress (1899 to 1901) (Exhibit 10.7).
Today’s political climate, however, seems different from much of American history in that, in earlier generations, members of Congress had major differences (as they do today), but they were willing “to reach across the aisle” to find common solutions. Such collegiality even spilled over into the White House. I well remember when President Ford and Speaker Thomas P. “Tip” O’Neill would argue vehemently with each other from 9 a.m. to 5 p.m., but at 6 p.m., Tip would stop by the West Wing to join his old House buddy Jerry for drinks. The work of government got done.
But while the Senate and House caucuses have always reflected deep differences between Republicans and Democrats, this does not appear to be the profile of the electorate. Surveys indicate a large bunching in the middle.* This seeming anomaly may reflect the severe geographical concentration of Democrats on the heavily populated East and West coasts of the country, with Republicans dominant in the mountain and southern states. I discuss the implication of such trends in Chapter 14.
ELEVEN
THE ONSET OF GLOBALIZATION, INCOME INEQUALITY, AND THE RISE OF THE GINI AND THE CRONY
The generation of Americans who fought and won World War II took the lead in creating our global economic structure tied to the U.S. dollar, and propelled the United States to its unrivaled status among world economic powers. They were famously labeled by Tom Brokaw our “Greatest Generation.” “They succeeded on every front . . . [and] saved the world. . . . They gave the world new science, literature, art, industry, and economic strength unparalleled in the long curve of history.”1 They spawned the baby-boomer generation and set out on a path that led the United States to become “the special nation.”
America’s unprecedented broad postwar assistance2 to its wartime adversaries—Germany and Japan—as well as to its wartime allies, was instrumental in the recovery from what, for Europeans in particular, had been six years of terror. But starting in the 1960s, America turned its benevolence and wealth to the home front, significantly expanding social benefit programs to assist those who had lagged in participating in America’s postwar affluence. The civil rights movement that took hold in the 1950s was instrumental in altering America’s domestic priorities.
Despite the onset of rapidly growing government social benefit outlays, income inequality began its inexorable postwar rise by the early 1970s (Exhibit 11.1).3 Inequality of both income and wealth in recent years has risen to a level that has opened up large crevices in America’s political system. Political comity has fallen to its lowest level since before World War II.
INCOME INEQUALITY: THE RISE OF THE GINI
The U.S. economy, which was subject to rigid economic control by government throughout World War II, quickly demobilized and became sufficiently flexible to emerge after the war with a degree of income inequality that remained modest for years. The Gini coefficient—named for Italian statistician and demographer Corrado Gini—a measure of income inequality that ranges between zero and one, that is, from none to total, was about .38 for family incomes shortly after the war and drifted lower until the late 1960s.*
The economy that emerged from the war was heavily industrialized. Manufacturing, the high-tech and high-paying industry of its day, accounted for 28 percent of GDP in 1953. Finance and insurance, the source of many of today’s high-income recipients, accounted for only 2 percent. By 2011, manufacturing’s share of GDP had slipped to 11 percent, while finance and insurance had climbed to 8 percent.
The skills required to operate our capital facilities were readily taught in American high schools and almost a third of our workforce coming out of the war had high school diplomas. In addition, extensive technical training of our military during the war and th
e educational benefits of the GI Bill4 following the war augmented the skill mix of our postwar labor force. Those veterans were fully capable of operating complex manufacturing assembly lines and our economic infrastructure in general. The level of output per hour from 1946 to 1973 rose at a vigorous annual pace of 2.7 percent. Real wages rose with it. American business, confronted with a huge hunger for consumer goods immediately after the war, had to produce all out. Strikes that shut down output were very costly and largely avoided by companies meeting most of labor’s demands for wages and benefits.5 Foreign production facilities had been decimated by the war and hence import competition for U.S. manufacturers was rare. Labor unions flourished in such a benign environment for collective bargaining, as companies were able to raise prices and accommodate unions’ demands.
THE GOLDEN AGE
Most factory and other skilled workers’ income rose to levels that enabled them to buy a home and raise a family.6 I recall visiting a number of friends back from the war who settled in Levittown on Long Island, a typical example of the new suburban communities that appeared to rise virtually overnight throughout postwar America. The emergence of the Cold War and threats of nuclear annihilation were real, but they couldn’t erase the state of pride and euphoria stemming from America’s world hegemony. We had nearly half of the world’s GDP and an unlimited future. In these early postwar years (1946 to 1970), income inequality was essentially flat (see Exhibit 11.1). That implied a stable ratio of wages earned in essentially repetitive jobs on an assembly line to those of cognitive occupations. Automation had just begun.
In the years that followed, we experienced the gradual displacement of repetitive jobs by competitive low-labor-cost foreign producers, especially China and East Asia, and increasingly sophisticated robots.7 The consequent increased inequality was most apparent in hollowed-out middle class incomes. The Gini coefficient turned upward in the 1970s and continued its upward climb for the next thirty-five years. The causes were numerous and interrelated.
The Map and the Territory Page 20
